China's Rural Leap Forward

Abstract

Collectively owned township and village enterprises (TVEs) played a pivotal role in China's rapid growth during the 1980s and 1990s. Although they originated in the policies and institutions of the Maoist era, TVEs thrived only after Deng Xiaoping's economic reforms redistributed property rights, taxing powers, and responsibility for the provision of public goods. These reforms made local governments dependent on their TVEs for tax revenues and gave party cadres powerful incentives to promote economic growth. Local officials often helped TVEs under their jurisdiction to gain access to technologies, capital, and production permits. Instead of rapidly privatizing its state-owned enterprises (SOEs), China gradually liberalized aspects of its economy in a controlled manner, often establishing a "market track" alongside its planned system. As the SOEs' share of output and employment shrank, that of the TVEs dramatically increased. By the mid- to late 1990s, TVEs accounted for nearly 40% of China's industrial output and had created about 100 million jobs. Nevertheless, party officials questioned whether the TVEs were a viable form of organization for an economy with ever-larger firms, more complex products and production processes, and the need for more capital and more skilled managers.

Capitalism, as defined in this book, is an indirect, three-level system of governance for economic relationships (i.e., economic, administrative, and political). Whereas economic markets can coordinate supply and demand within an existing system thanks to the invisible hand of the pricing mechanism, capitalism must have the administrative capability to regulate the behavior of economic actors within those markets and the political capability to redesign their institutions; regulation and the design of market frameworks require the visible hand and coercive powers of a political authority. This three-level structure closely parallels that of all organized team sports. The play on the field is like the markets of capitalism, and the actions of the players are regulated by referees who enforce a set of rules created and promulgated by a political authority that enjoys an anti-trust immunity. Capitalism is not a natural system and it did not emerge or spread by an unguided process like biological evolution; it has only existed since the liberation of the markets for land, labor, and capital, i.e., the end of feudalism. Its spread is a story of the politics of hostile takeovers and/or liberation. Capitalist evolution requires the continuing transformation of its three levels of governance.